Selector community speaks out on most concerning regulations
Central clearing of FX options, Basel III, Solvency II, and AIFMD are among the key pieces of regulation that selectors have identified as causing most concern in terms of their effect on the asset management industry and, ultimately, clients and investors.
Leave FX options alone
Name: David Collins
Title: Global Head of Strategic Solutions
The wooden spoon goes to the move to include FX options in central clearing as part of a catch-all for OTC instruments.
Over-the-counter FX options operate as an efficient market that meets the needs of its users and provides genuine utility to hedge risk and manage exposures. It just works and, more to the point, it played no part whatsoever in the 2008 crisis, so there is no requirement to wrap it in red tape and create inefficiency.
Despite this, regulators want CCPs to guarantee full and final settlement for forex options – this goes beyond existing market infrastructure and places a huge additional liquidity burden on CCPs in the event of a clearing member default.
Not only is a ‘solution’ not necessary, but the prescribed medicine is complicated, fraught with difficulty and counterproductive. Back in 2008, there was no need for FX options to be cleared, and this remains the case.
Name: John Ventre
Title: Head of Multi-Manager
Company: Old Mutual Global Investors
Base : London
Light-touch regulation contributed to the credit crisis. The danger now is that the pendulum is swinging too far the other way.
The effects of the capital requirements of Basel III and the regulatory impact of Dodd Frank are being widely felt. Liquidity in financial markets has fallen, in some areas severely. The ability of banks to play a role in reviving economic activity is severely limited.
Solvency II requirements are less visible but risk pushing life insurers into an ever-tightening value trap. Instead of buying the cheap assets – equities – most likely to provide the future liquidity they require, they will be legally obliged to buy government bonds.
These in turn, in part due to insurers’ forced buying, are shockingly expensive and, as a result, higher risk and less and less likely to provide the funding needed to match the future liabilities for which they are intended.
Name: Kristof Woutters
Title: Head of Financial Engineering & Pension Solutions Expert: Company Dexia Asset Management
The biggest challenge for institutional investors is the move towards so-called ‘risk-based’ supervisory regimes and the unintended negative effects that pro-cyclical behaviour is having on the financial markets.
The basic principles of ‘risk-based’ prudential supervision are sound and some form of regulatory reform is clearly needed to restore investor trust.
However, the current ‘risk-based’ frameworks already implemented or that lay on the table are clearly overly restrictive, reliant on inappropriate ‘fair valuation’ principles for long-term liabilities and have capital requirements that are too high.
The ‘buy high/sell low’ behaviour encouraged by ill-designed frameworks can lead to pro-cyclical behaviour. By the same token, the use of ‘mark-to-market’ accounting rules also increases the volatility of balance sheets and does not promote stability.